War-time thinking needed, not therapy

It is truly a perfect storm. With the COVID-19 pandemic, every single new development in the conditions of doing business in the past few days has been totally unexpected, unprecedented and beyond imagination. It is not just public places such as malls, courts, airports, ports, buses and trains that have been forced to shut down for all practical purposes. Even commercial establishments and offices are required to be closed. Barring health care and grocery, every piece of commerce is meant to come to a grinding halt. Such an extraordinary situation would require an extraordinary response from the framework of the law.


The Supreme Court has led the way — using the powers under Article 142, the provision by which the court is often termed (wrongly) the most powerful court in the world, the Supreme Court has ruled that all deadlines for limitation stand extended. Any dispute to be agitated before the courts has to be initiated within deadlines stipulated in the law — imposing a limitation of time by when action needs to be taken. The court is cognisant of the fact that access to courts is next to non-existent because of the extraordinary circumstances.


Lest there be any confusion among the courts below, the Supreme Court also made an explicit reference to Article 141 and communicated the order to all High Courts, asking them to implement and similarly direct the courts below them. Article 141 states nothing but the vital principle that the law declared by the Supreme Court would be binding as precedent on all courts in the territory of India. The court hardly needs to remind that this provision in the Constitution exists — but the extreme situation the nation is in has led to the court making it clear that this is not a routine administrative decision but a decision that would have judicial impact across the nation.


In this backdrop, every constituent in the economy and the legal system governing the economy have to completely reboot and think afresh about how to handle matters that would otherwise be routinely handled in terms of a norm.

That businesses will start failing soon is writ large. The finance ministry and the Ministry of Corporate Affairs have announced that the threshold for initiating insolvency and bankruptcy proceedings would stand raised. If a corporate debtor is unable to pay debt due to the extent of Rs 1 lakh, the creditor may initiate resolution proceedings — that limit is being hiked to Rs 1 crore. In the same breath, it was also announced that the situation would be studied until April 30, after which the government may even suspend the provisions that enable a creditor or debtor to initiate proceedings under the Insolvency and Bankruptcy Code, 2016.


While it is heart-warming that the system is thinking about the problems staring at the economy in the face, the aforesaid measures can actually be meaningless. If one were to say four weeks in advance that the very access to the operation of the insolvency and bankruptcy regime could be removed by April 30, it would mean that those who are in doubt about whether to pull the trigger would indeed be nudged into triggering the proceedings before April 30. That would lead to a rush of filings to initiate insolvency proceedings. Meanwhile, the National Company Law Tribunal has almost shut shop entirely to help deal with COVID-19. In a nutshell, the signalling to the economy is as confusing as the fatality statistics relating to the effect of COVID-19.

The capital market regulator would be under stress to shut down the markets.Complicating matters is the fact that this is not a situation of some institution in one part of the world going under but a worldwide closure of entire cities and states being undertaken, and so is the case in India too. Share prices crash across the board and shares held as security would be out of the money for banks and lenders. If they sold securities, they would get a fraction of the debt due to them, and yet inflict disastrous consequences on the borrower. Without actually shutting markets (those who want to sell at disastrous prices may sell provided they find buyers), the financial regulators must find a way to suspend enforcement of rights and performance of obligations during the world’s biggest universal force majeure situation.


Companies being told they need not hold board meetings is just a scratch on the surface. What is needed is a framework to enable companies to take bold decisions to think of the next three years. Almost the entire legal framework is built on the premise of healthy growth — let’s call it bull market regulation. No one envisaged such a horrible long-term bear market expectation when they wrote law. It is time to rethink. Something like an extraordinary legislative intervention in the form of the judicial order to extend limitation. To cite a vocal private equity investor friend, “This is time for surgery, not homeopathy or therapy”. While at war, the thinking governing war must be brought to bear rather than adopting a clerical application of peace-time policy framework that is mildly tweaked.


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